Oil Trading Alert: Crude Oil - Breakdown or Failure?

On Thursday, crude oil gained 0.42% as the EIA report showed a larger-than-expected
drop in U.S. gasoline supplies and shrinking inventories in the Oklahoma. These
positive numbers overweighed bigger-than-expected build in crude oil stocks
and pushed the commodity to the previously-broken support/resistance line.
Is this the beginning of further improvement or just a veryfication of the
breakdown?

Yesterday, the U.S. Energy Information Administration showed in its weekly
report that crude oil inventories rose by 1.657 million barrels last week ,
while analysts had expected crude inventories to rise by 483,000 barrels. As
we mentioned earlier, this bigger-than-expected build in crude oil stocks was
overshadowed by bullish gasoline figures. Gasoline supplies declined by 1.803
million barrels last week, contrary to expectations of a 283,000-barrel increase.
On top of that, oil investors focused on shrinking supplies in the Oklahoma,
which stood at 21.7 million barrels as of May 23, the lowest level since 2008.
Please note that inventories in Cushing have fallen 16 out of the last 17 weeks
and are down more than 20 million barrels since late January, when a new pipeline
opened to ship oil out of storage to refineries along the Gulf Coast.

Thanks to these circumstances, the price of crude oil moved higher despite
a mixed bag of U.S. economic indicators. Yesterday, the Bureau of Economic
Analysis reported that U.S. gross domestic product in the first quarter declined
for the first time since the first quarter of 2011. Despite this bearish data,
the report also showed that consumer spending increased by 3.1%, indicating
that economic activity has rebounded. Additionally, the Department of Labor
showed in its weekly report that initial claims for jobless benefits in the
U.S. last week fell by 27,000 to 300,000, beating expectations for a decline
of 9,000.

Did yesterday's increase change the short-term or medium-term outlook? Let's
look for answer on the charts (charts courtesy of http://stockcharts.com).

The medium-term picture hasn't changed much as crude oil still remains below
the blue resistance line based on the recent highs (the upper border of the
triangle). Therefore, what we wrote yesterday is up-to-date:

(...) If this line holds, we will likely see a pullback and the nearest
support will be the 50-week moving average (currently at $100.80) (...)
the last week's increase materialized on relative small volume, which questions
the strength of oil bulls. On top of that, the RSI approached the level
of 60. We saw similar reading in April and also earlier in March. Back
then, such readings preceded declines. Therefore, if history repeats itself
once again, we may see a correction in the coming week (or weeks).

Looking at the above chart, we see that although crude oil rebounded, the
previously-broken lower border of the rising trend channel successfully stopped
further improvement and the commodity reversed. Additionally, sell signals
generated by the CCI and Stochastic Oscillator are still in play. Therefore,
we remain bearish and see this upswing as nothing more than a verification
of the breakdown below the black dashed line. If this is the case, the commodity
will extend losses in the nearest future and the first downside target will
be around $102.30, where the 38.2% Fibonacci
retracement based on the entire May rally is. If this support doesn't stop
the selling pressure, we will see further deterioration and the next target
for oil bears will be the black medium-term declining support line (currently
around $102).

Before we summarize today's Oil Trading Alert, please keep in mind that even
if oil bulls do not give up and manage to push light crude higher, we remain
convinced that the resistance zone created by the blue and black resistance
lines and also the April high will be strong enough to stop further improvement.

Summing up, although crude oil rebounded, reaching the previously-broken
lower border of the rising trend channel, we remain bearish and see this upswing
as nothing more than a verification of the breakdown below the resistance line.
If this is the case, it will be a bearish signal and we'll see light crude
around $102 in the coming day (days).

Nadia is a private investor and trader, dealing in currencies, commodities
(mainly crude oil), and stocks. Using her background in technical analysis,
she spends countless hours identifying market trends, major support and resistance
zones, breakouts and failures. In her writing, she presents complex ideas with
clarity that enables you to easily understand market changes, and profit on
them. Nadia is the person behind Sunshine
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wrong and be a subject to change without notice. Opinions and analyses were
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Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
an offer nor a recommendation to purchase or sell any securities. Mr. Radomski
is not a Registered Securities Advisor. By reading Przemyslaw Radomski's,
CFA reports you fully agree that he will not be held responsible or liable
for any decisions you make regarding any information provided in these reports.
Investing, trading and speculation in any financial markets may involve high
risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates
as well as members of their families may have a short or long position in
any securities, including those mentioned in any of the reports or essays,
and may make additional purchases and/or sales of those securities without
notice.